Zane Mann

As usual, California tax-free municipal bonds were one of the safer investments during Wall Street's tumultuous 1998--except for individuals and institutions that held nine bond issues worth $89.2 million. That was the total amount of California deals that defaulted last year, meaning at least one principal and interest payment was missed. However, thanks to a healthy state economy, last year's default level was well below the total in 1997, when a record $212.

State Treasurer Phil Angelides and a delegation of finance officials sought to reassure Wall Street on Thursday that California's $12.5-billion energy bond sale is on track, despite repeated delays and continued questions about the safety of the securities. On a trip to New York this week, Angelides met with bond-rating officials and managers of large mutual funds to tout the securities.

Orange County's bankruptcy recovery won its strongest Wall Street endorsement--and a $108-million windfall--when a rating agency raised the county's lowly investment rating Wednesday for the first time since its 1994 financial collapse. The action by Moody's Investor Service will allow the county to borrow money at lower interest rates and without the costly insurance it is now required to pay.

Brokerages will begin taking orders Friday from small investors who want to buy some of the power bonds California will sell next week. The offering is expected to attract investors who are hungry for decent yields, with rates on U.S. Treasury securities near 40-year lows, analysts said. In the second phase of the biggest municipal bond deal in history, the state will offer $6.75 billion of tax-exempt fixed-rate bonds.

Orange County won over a reluctant Wall Street on Wednesday, clearing the final hurdle in its efforts to emerge from the nation's largest municipal bankruptcy filing ever. Buoyed by strong demand from both East Coast bond funds and well-heeled California investors, the county sold $880 million of bonds, giving it just enough money to pay back its bondholders, vendors and other creditors.

"How safe are my muni bonds?" A growing number of California investors are asking that question, as the state and many of its cities, counties and school districts wrestle with unprecedented budget deficits. Though the vast majority of California muni bonds remain problem-free, state agencies, brokerages and bond rating firms are scrambling to gather fresh information on this often-murky $130-billion market and its myriad issuers.

It seems increasingly likely that Orange County will eventually be forced to restructure and possibly liquidate all or most of its huge bond portfolio, either through deep discounts or some type of complicated swap, experts said Thursday. "Everyone knows this stuff is going to have to hit the street sooner or later," said Steven Clarke, a former director of fixed-income investments at Goldman Sachs & Co.

Citing concerns about any bond issues linked to bankrupt Orange County, Moody's Investors Service said Wednesday that it will evaluate $1.1 billion of bonds being sold next week to build a toll road--even though it has not been asked to review them. Moody's, one of Wall Street's major rating services, said the unprecedented move was prompted by inquiries from worried investors. Normally, rating agencies review an offering only at the seller's request.

Goldman Sachs Group Inc., hoping to cash in on the rising wave of California municipal borrowing, Monday named former state Treasurer Kathleen Brown to head a new Los Angeles-based public finance office. A widely known Democrat in a state with Democrats in most of the top government jobs, Brown is expected to function as a "rainmaker" who will use her contacts to help win bond underwriting business for Goldman. "She can schmooze with the best of them, and that's what the job takes," said Zane B.

Investors in tax-free municipal bond funds have a lot to be thankful for this year. Interest rates have dropped in 1991, pushing up the values of all bond investments, including tax-free funds. And despite the weak economy, the vast majority of cities, states and local governments haven't fallen over the edge financially.